Chinese economic collapse: cheaper materials in US but fewer building contracts | Notes from Jim Haughey

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Notes from Jim Haughey
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Chinese economic collapse: cheaper materials in US but fewer building contracts

Jim Haughey

RCD Chief Economist

Dec 30, 2008

The development of large domestic markets in China and other Asian countries in recent years will prevent the sustained GDP decline that the US is now experiencing but will sharply cuts imports from the US, especially for industrial machinery, farm products and business services. The machinery dominated regions in the US, the Northeast, parts of the Midwest and California plus the farm belt and also the major business service centers in the Northeast, Chicago, Atlanta and San Francisco are now feeling the sting from the declining Asian economy.

In the Pacific Northwest, layoffs in technology industries who export most of their production as well as reduced port traffic have suddenly made Oregon, Washington and Idaho the fastest declining regional economies in the US. The heavy equipment industry in the Midwest, heavily dependent on exports, has recently stalled after a long boom. Caterpillar has announced layoffs and Deere projects no sales increase in 2009.

The recession has also belatedly arrived in the finance, consulting, insurance and professional business centers of Boston and New York. Layoffs have begun and some commercial building projects have been deferred as real estate investors sense an imminent surge in sublease office space competing with new space.

The decline of a major export industry in the Northwest, Midwest and Northeast is already setting off declines in hiring and space needs in local service industries which will persist for many months. This is exactly what happened in Las Vegas, Phoenix, Sacramento, Tampa and Miami when their huge housing markets collapsed.

The collapse of the worldwide commodity price bubble caused the index for construction materials prices to drop 6.0% from September to November. This was almost as large a change in two months as the annual increases during the housing boom in 2004-06. Further but smaller declines are likely for a few more months. Raw commodities and construction materials prices will be driven below the market equilibrium for several months as manufacturers and distributors unload surplus inventory at distress prices. Prices will be slowly trending higher in the latter part of 2009 but will remain low compared to the peak prices in the middle of 2008.

The US economic and construction forecast now has to include the much higher risk of more serious economic collapse in China or other key developing countries. The probability has risen in the last few months from trivial to small but too large to overlook. Recall that many developing countries have experienced one or more economic collapses with a surge in social disorder in recent decades that dropped GDP sharply for several years. The list includes China, Korea, Thailand, Malaysia, Indonesia, Nigeria, Brazil, Argentina, Mexico, Turkey and Russia.

Recent reports from China about widespread factory shutdowns (there is no unemployment insurance) and urban rioting are disturbing and need to be watched closely. Chinese imports from the US are a much larger share of the US economy than were US exports to any of the developing countries that experienced an economic collapse previously.